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A Disappointing Whistleblower Report from the IRS

The IRS recently released its Annual Report to Congress on its whistleblower program and the results are discouraging even for an agency that has a questionable track record when it comes to dealing with whistleblowers. Despite having received more tips than ever – over nine thousand of them — the IRS paid only $53 million to whistleblowers in 2013. This is a sharp drop from the $125 million paid out in 2012, though they are far better than meager payouts before that ($8 million in 2011; and $18.7 million in 2010). Unfortunately, this year’s tally shows that, despite all the criticism directed towards the IRS whistleblower program, the agency remains sluggish in its whistleblower enforcement with no signs of picking up anytime soon.

Part of the problem seems to be that the agency is simply too slow to investigate tips. The report shows that the IRS Whistleblower Office has yet to close roughly 800 investigations that were prompted by whistleblower tips received more than seven years. And thousands of additional investigations remain open from whistleblower tips received since then: 1,373 from 2007; 1,060 from 2008; 2,025 from 2009; 6,253 from 2010; 2,308 from 2011, and 3,095 from 2012. The tips are flooding in – tips that could return to the IRS billions of dollars – and it appears that no one in the agency is listening.

With respect to the investigations that the agency has closed, the IRS acknowledged in the report that hundreds of them were done so only because there were insufficient resources to investigate them or because the statute of limitations was close to running out. With long processing times, dead claims, and whistleblower payouts that are too few and far between, the IRS Whistleblower Office risks losing credibility. To some, it already has. Senator Grassley, a longtime champion of whistleblowers, and one of the key architects of the 1986 amendments to the False Claims Act and other major whistleblower legislation, said that “[t]he bad news is the progress in making payouts is slow. My worry is that the slow progress will cause the tips to dry up.”

The IRS itself has done nothing to dissuade the widespread feelings of discouragement toward its office. In fact, it has done the opposite in trying to defend the latest figures. The IRS statement accompanying the report sheepishly predicted for next year that the number of [whistleblower] payments … is not projected to grow dramatically in fiscal 2014,” and that “it typically takes five to seven years to analyze, investigate and/or audit, and collect proceeds.” A dismal outlook for sure.

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2 Responses to “A Disappointing Whistleblower Report from the IRS”

Doing the right thing is essential to the orderly operation of a free and law-abiding society. Studies repeatedly show that most white collar fraud investigations start with a whistleblower’s tip.

However, individuals can be forgiven for not martyring themselves and risking their family’s well-being in an attempt to help law-enforcement, especially when there are so many whistleblowers broken by the fraudsters via retaliation and no properly functioning retaliation remedies, recoveries, or rewards happening nowadays through law (excepting qui tam relator’s shares) or tax enforcement bodies.

No potential whistleblower who’s seen what has happened to those that came before them and blew the whistle can also be blamed for deciding it is just better to hang one’s head and move on than to try and right a wrong. There are just too many disincentives, and enforcement-fails, or corrupted initiatives (like the IRS Whistleblower Program, which with every annual update to Congress, increasingly reveals itself as a pernicious pretentious charade.)

I am probably the poster child of what Sen. Grassley has feared coming to pass: The IRS WB initiative dying the death of a thousand disincentivising cuts by driving off that it was established to leverage.

Speaking for potential WB’s, like myself, who have taken an analytical wait and see approach to the development of the IRS’ WB program, I can only say that I am not encouraged by the WBO’s 2013 Report (which itself runs less than 30 pages, a vast portion of which is copy/paste from last year’s report, is still wonderfully opaque and took 6 months to produce – talk about a prime indicator of the lack of vigor, attention and priority given to this program.)

Suffering retaliation from my employer and damage to my career and professional relationships, and my family’s well-being, as the result of trying to prevent my management from perpetrating fraud, with no subsequent remedy available (as under FCA), has made me loath (translation: afraid) to approach the WB office given their track-record and that the IRS Chief Counsel’s proposed reward regulations seem to codify a game rigged against an expansive view of calculating WB rewards (and to add insult to injury, the IRS claws back massive portions of their long-delayed and scrupulously minimized rewards by deducting a Sequester Surcharge of 7.2% and then taxes the remainder at ~30% ((some say 50%!)).

Anybody who has ever had a conversation with the WBO like I had, would be forgiven for thinking they had called into an ADD-affected college surf or pizza shop for the lack of professionalism and knowledge displayed by the folks that I spoke to. (This in severe contrast to my previous calls into competent helpful folks at the IRS’ general 800-number.)

Despite the departures of former Chief Counsel Korb (who famously said “The IRS didn’t ask for these rules; they were forced on it by the Congress”), former Commissioner Schulman and former Director of Enforcement and disgraced Commissioner Miller, it is hard to see any kind of sea change in the institutional resistance or the bureaucrats’ apparent viewpoint that, sans whistleblowers, they already possess all the tools necessary (and given infinite time) to find all non-compliances.

Despite the ascension of self-avowed “whistleblower fan” Koskinen to the Commissioner’s chair, is difficult to detect new institutional enthusiasm for, or a desire to cooperate with, a resource that solely benefits the public fisc. Rather, it feels as if slow-walking and barriers are intended to discourage that resource from embarrassing the Service by reminding the public that some frauds are not possible to discover, contour or prosecute without the help of a WB.

Even that grand old man, the congressional patron of WB’s everywhere, Sen. Grassley, released a very mild statement on the lackluster report issued by the WBO. It seems as if the Service (in a strategy of frustration, fatigue and waiting-out biological inevitability, or maybe just plain bungling and dumb luck) has finally bested this old warhorse and he is giving up.

So much rhetoric is devoted to what a success the WB programs are, but there seem to have been no real actions over the last 4 years to further optimize legislation to improve protections and incentives and to remove barriers. Sure, Sen. G. has been able to leverage commitments from IRS honchos by putting holds on nominees, but this kind of tactual action is opportunistic, not sustainable, and doesn’t replace strong strategic legislation. (Nor does it obviate the growing impression that the Service is engaged in a form of malicious compliance while the Congress has run out of gas.)

Some suggestions:
1. Anti-retaliation remedy for any WB making a new submission to the WBO. As under FCA allow WB to be made whole if WB acted in good faith to prevent fraud and suffered as a result of this (regardless of whether there are collected proceeds). Don’t subject this provision to a shorter statute of limitations than the crime it is related to.
2. Force the Service to utilize an expansive reward compensation and Related Proceeds calculation scheme, rather than the stingy and disincentivizing scheme that seems sure to drop any day now;
3. Communications outreach plan? From the organization that seems so adept at hiding its lamp under a bushel? (Go to the IRS’ homepage, where is the link to the WBO?). Best communications outreach are strong protections and incentives for potential WB’s as well as delivering on these in a very generous and timely way. Good would be for Mr. Whitlock to start by hanging out his shingle on the IRS’s homepage (as per SEC’s example) and 1040′s, and to robustly declare the WBO as “Open For Business”;
4. Fix the code to:
a) index all penalties for inflation (effective back to the date the penalty was enacted);
b) increase the penalty for tax fraud from 75%, to parallel the civil treble damage fines used under the FCA;
c) require the Service to amend WBO submission Form 211 to incorporate by reference the responsibility for each WB (and counsel) to be bound by the obligations of the Service’s 6103(n) non-disclosure agreement. Revise the “infrequent and unusual” language from the JCT to authorize “frequent and normal”, to eliminate this as a justification by the IRS for avoiding using 6103(n) NDA’s, and promote “frequent, normal and expected” as the IRS’ new rules for WB engagement;
d) make deep engagement and utilization of the WB in investigations a part of each IRS employee’s compensation package.
e) revise the tax code to name and shame those brought to justice as a result of a WB’s input. Such action should not be reserved to only those tax scofflaws who have been brought to justice under criminal statutes. Downstream benefits: 1) tax-fraudster deterrence, 2) WB encouragement, and 3) Improved WBO annual report due to less aggregation of data);
f) building on e) above, require the WBO to write a synopsis of each recovery due to a WB tip and release these as a press release, then include these in a case-study manual for potential WB’s, such that individuals can be made aware of how schemes are perpetrated be in the lookout for such activity;
g) limit the Service’s discretion for reducing or eliminating fines, fees, penalties and interest for tax scofflaws brought to justice due to a WB’s input;
h) revise the Victims of Crime statutes to allow WB’s a share of all fines, recoveries, restitution ordered due to a criminal prosecution in conjunction with a WB’s input;
i) revise IRC to eliminate taxation of WB rewards (if we want to encourage a universal ethic that whistleblowing is socially beneficial, eliminating this 30% hit should apply to all government-sanctioned WB rewards.);
j) enact legislation exempting WB rewards from the 7.2% Sequester Surcharge.

The WB system as it is is being abused and frustrated by the IRS culture from top to bottom and from input thru output. What kind of committed and competent enterprise fails to pick low-hanging fruit (or foes) but just leaves it to rot? This is the result when the IRS closes WB files because of “lack of resources” or “too short statute of limitations” (despite having policies to extend the SOL with the TP’s consent.

What should be a closed-loop virtuous cycle resulting in more and better WB submissions and less tax scofflawism, begins and ends with strong anti-retaliation remedies, fat incentives, seamless communication and expeditiously competent processing of WB’s tips, not the polar-opposite approach in use today.

Whether the current situation is mostly due to bureaucratic sluggishness, institutional enmity, leadership malfeasance, incompetence, overwork, or congressional neglect is hard to say, but each of these disincentives are in play and being placed before WB’s by both the IRS AND the Congress.

Unless real reforms and further optimizations of the protections, rewards and procedures relating to the Service’s WB program are (again) forced upon it by Congress, nothing will change in terms of IRS commitment and involvement or in terms of recovery and deterrence.

Until something drastically changes, nothing can change for citizens such as myself that see the personal risks as too great to come forward. I am very disappointed in my government’s administrative and legislative branches for practicing bait-and-switch and demolition via neglect respectively.

The failure of the WBO program (and this points directly to the dolts, where found and as appropriate, in the Commissioner’s Office, the Chief Counsel’s Office, the WB Office and the rest of the IRS’ bureaucracy in general) well reflects my mashed-up adage of:

“He who knows the price of everything but the value of nothing,
Is destined to be both penny-wise and pound foolish”